How to Read Candlesticks: Charts, Patterns & Pro Tips

The theories behind candlestick charts are so abundant that one could write a book about them, and many have.

At first, candlesticks look very difficult to understand, and there are at least 60 different main patterns. Who has the time to learn the name of every pattern and its meaning? Not you, I can imagine.

What Are Japanese Candlestick Patterns

Japanese Candlestick charts represent the supply and demand of any stock or asset. Developed in the 1700s, Japanese candlesticks were used to track rice prices. Today they are used on stocks, commodities, and foreign exchange. There are over 120 candlestick patterns to learn and recognize, making the whole process of analysis very time-consuming.

Used widely in Japan and gaining a strong foothold in the rest of the world, the Japanese Candlestick chart gives an excellent insight into current and future price movements. It is called a Candlestick chart because the bars look like candlesticks with a wick and the main body.

I use Candlestick charts exclusively when doing my analysis when you get used to how they work; they provide an unparalleled inside into the short-term market dynamics of a given stock.

Candlestick Pattern Recognition Algorithms & Indicators

Before you jump into a headlong three months of studying and analyzing Japanese Candlesticks manually, I highly recommend you use the power of modern stock charting algorithm software to do the job for you.

Three of our review-winning stock market charting software have functionality that can better identify and analyze candlesticks than humans can. Give them a try.

CandleStick Software	TrendSpider	TradingView	MetaStock
Rating	★★★★★	★★★★	★★★
Patterns Recognized	123	27	52
Pricing	Included	Included	$349 add-on
Full Review	Read the Review	Read the Review	Read the Review
Get the Software	Visit TrendSpider	Visit TradingView	Visit MetaStock

 

Read more about the best Candlestick Pattern Analysis & Recognition Software.

Learning Japanese Candlestick Analysis

This section will show you how Candlesticks work and focus on what they are trying to tell us. There are a few psychological principles involved with Candlesticks, and when you know them, you can understand the meaning of all the patterns without having to learn them all.

Two Types of Japanese Candlesticks

The first candle has a black or filled body indicating the day was a price-down day. A white or hollow candlestick indicates an up day. The lines above and below the main body are referred to as the “Shadows” or “Wicks.”

It is also worthy of note that candlesticks show the day’s price elegantly as the extent of the surge or “Trading Range” from Opening Price to Closing Price can be seen very clearly.

Once you get used to Candlesticks, I am sure you will never return to OHLC Bars again.

Candlesticks are used to predict the movement of the price over the course of the next few days. Candlesticks are of two types, “Reversal Patters” and Continuation Patterns.”

How to Read Candlesticks

The key to reading candlesticks is understanding the candle’s body length and fill. A long hollow body means the stock price surged on a greater demand. A long-filled body means a strong fall in stock price on increased selling. Long wicks mean an extreme high or low that failed, indicating a short-term trend reversal.

How to Read Candlestick Charts: 7 Step Example

1. Filled Candlestick – Price Down

A filled Candlestick is a dark color depicting the night, referring to the sun setting, which means the price has, like the sun, gone down for the day.

2. Hollow Candlestick – Price Up

The Hollow Candlestick represents the rising of the sun, white and full of light. Like the sun, it rises, and so does the stock price for the day.

3. Candle Open – Bottom of Hollow Candle, Top of Filled Candle

A hollow Candlestick has the opening price at the candle base; of course, this is easy to remember because the hollow candle rises like the sun, so the bottom of the candle is the opening price.

For the filled “dark” candle, we know the sun has set on this stock for the day, and the price went down. This means the top of the candle body is the opening price, and the top of the filled candle is the closing price.

4. The Candlestick High – Top of the Wick or Candle

Surging through every candle is a wick, and it is this wick that makes the Candlestick so impressive. The top of the Candlestick wick is always the price high for the day. The longer the upper Candlestick wick, the higher the stock price was, and the more the price was beaten down for the day.

5. The Candlestick Low – Bottom of the Wick or Candle

The Candlestick wick also runs through the bottom of the candle. The presence of a long lower wick indicates that the stock price went very low for the day, but the market traders decided that this low price represented bargains, and demand for the stock drove the price higher. Ultimately this created a long lower wick and is a bullish signal.

6. The Candlestick Close – Bottom of the Filled Candle or Top of Hollow Candle

The closing price is always the lower part of the candle’s base for a filled Candlestick. The sun has set on the candle, and this is where the price closed.

A hollow Candlestick means the sun’s rising; therefore, the top of the body is the closing price.

7. The Candlestick Wick Shows the Day’s High and Low

The final key lesson here is the length of the Candlestick wick. A long wick that extends through the body, both above and below, suggests a strong equilibrium between buyers and sellers has been found. Both a higher high and a lower low were tested, and the market participants agreed on a balance in the middle.

This long wick in a Candlestick leads us to the best reversal sign in Candlestick charting, the DOJI.

The Doji Reversal Candlestick Pattern

The “Doji” is when the opening and closing prices are very close together. You can see the price pattern here; the price went down, then the Doji appeared, and then the price reversed and proceeded upwards.

The Doji is one of the most common reversal patterns, and when you understand it, you will see it everywhere.

This graphic shows one of the most popular uses of a candlestick chart to spot a “reversal.”

 

 

5 Best Candlestick Reversal Patterns

As we are concerned with spotting changes in price moves, we will focus on the Reversal Patterns. This section is the Bullish Reversal Pattern, meaning when a price is moving down, and you see this sign, the price may change direction and start moving up in the short term. These are the most common patterns; not an exhaustive list, but they will give you an idea of what is common in all patterns.

The Hammer

The hammer can be either filled or hollow; the Japanese say the price is hammering out a bottom. What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow); however, the price has returned higher by the closing bell.

The lows were tested, but the price found no comfort there; there were enough buyers at this level to move the price back up.

Inverted Hammer

This hammer shows that the stock gaps significantly down at the end of a downward move; there is much movement throughout the day moving back to fill the gap, but the price settles lower for the day. This shows significant price action, and buyers show a strong interest in the stock at these levels.

Bullish Engulfing

Here we have a negative spinning top or a short day during a downtrend, followed by a long day of real power; the long white body tells you something significant has changed, and so has the sentiment, a clear trend reversal.

Bullish Harami

During a downtrend, we experience a very negative “Long Day,” followed by a short positive day. This indicates the market participants have found a level they are happy with. Candlesticks are most useful when predicting a change in trend; this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend. In the case of this Harami, the change in trend may be from downwards to sideways.

Piercing Line

This shows a day of real strength following a very negative day. The White candle gaps down on open, but the buyers show real demand throughout the day to retrace more than 50% of the previous day’s losses.

Japanese Candlesticks Positives

Candlesticks give an excellent view of the Open, High, Low, and Close prices. Pictorially illuminating and easy to see trends. There is a full reference of 1 bar to 4 bar patterns, which helps us make judgments on the future direction of price. They connect psychology with the price pattern. An easy-to-learn system for understanding candlesticks is available in the Liberated Stock Trader PRO Training Course, including a video to help you master these charts.

Japanese Candlesticks Negatives

Although Candlesticks have many advantages, they can seem like information overload to the beginner. There are also many Candlestick patterns to learn.

Candlestick Analysis During the 2008 Financial Crisis

Let’s look at a great example of how Candlesticks work, casting an eye back to June 2010.

It was a flat day on the market. One thing that certainly stood out to me was the chart pattern for the day. The day was extremely uneventful, with the market participants backing away from the higher prices. Volume was lower than the previous day suggesting traders paused for breath.

What is interesting is to look at the price pattern using Candlestick analysis.

The Doji is a Candlestick pattern that suggests indecision in the marketplace. The Open and Close prices are very close, yet there is a longer distinguishable wick. Above is a 3-month chart of the DJ-30.

13 Point Candlestick Crash Analysis

I have picked out some of the more notable signs of indecision, Dojis, Hammers, Spinning Tops, and Long Legged Dojis (also known as a Rickshaw Man):

1. The first arrow shows the price trending up during April 2010.
2. Next, we see a Doji occur.
3. Price then proceeds to move downwards.
4. Price moves aggressively downwards and halts at 9875,
5. Price begins to recover.
6. Then we see a Spinning Top.
7. Two days later, the trend changed and moved down again.
8. Then a Hammer occurs, and the trend changes to short-term positive.
9. Then at the start of June, we see a Doji.
10. The following day the price moves down again.
11. We then see an Inverted Hammer.
12. The price moves up again.
13. Then yesterday – June 16th, 2010, we saw a Long-Legged Doji.

Top 12 Chart Patterns Proven Profitable & Reliable

Candlestick Summary

Each Candlestick pattern has a specific story to tell. If you can understand the story being told, you do not need to memorize each pattern’s name and the textbook meaning. Re-read this article and try to imagine the story. Combining the action of multiple days will allow you to understand the market participants’ current psychology, giving you an insight into tomorrow’s price action.

Automated Candlestick Stock Charts

Is this already too much information? There are only 150 more Candlesticks to memorize and recognize. Or you could use software that will do the job for you.

Candlestick Software	TrendSpider	TradingView	MetaStock
Rating	★★★★★	★★★★	★★★
Patterns Recognized	123	27	52
Pricing	Included	Included	$349 add-on
Full Review	Read the Review	Read the Review	Read the Review
Get the Software	Visit TrendSpider	Visit TradingView	Visit MetaStock

 

For an in-depth guide to Japanese Candlestick charts, please look at our Pro Stock Market Training.

 

---

You want to be a successful stock investor but don’t know where to start.

Learning stock market investing on your own can be overwhelming. There’s so much information out there, and it’s hard to know what’s true and what’s not.

Liberated Stock Trader Pro Investing Course
Our pro investing classes are the perfect way to learn stock investing. You will learn everything you need to know about financial analysis, charts, stock screening, and portfolio building so you can start building wealth today.
★ 16 Hours of Video Lessons + eBook ★
★ Complete Financial Analysis Lessons ★
★ 6 Proven Investing Strategies ★
★ Professional Grade Stock Chart Analysis Classes ★

Find Out More

---